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The Bad Boy of Insurance Ratings

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Executives at the Travelers Corporation were horrified. In August, analysts at Weiss Research Inc., an insurance-rating firm, assigned a "weak" rating to Travelers's life-insurance subsidiary. The rating, reflecting the company's outsized portfolio of troubled real estate loans, touched off a wave of telephone calls to Travelers from jittery policyholders and agents.

So in September, a team of Travelers executives boarded the company's private jet and flew to Weiss Research's headquarters here in an attempt to get the rating changed. As a pair of stretch limousines stood idling outside, the executives tried to persuade Weiss analysts that Travelers had ample capital to weather its difficulties. But despite two hours of tense negotiations, the analysts, who use an A-to-F grading system, agreed only to raise their rating to C-, from D+.

Assigning low grades to large, well-known life insurance companies has become something of a trademark for Weiss Research, which began rating insurers only two years ago. Giants like Aetna, Equitable and Kemper may enjoy above-average grades from the leaders of the insurance-rating field -- A. M. Best, Standard & Poor's, Moody's and Duff & Phelps -- but not from Weiss. Concerned by the large losses that insurers have suffered on real estate and junk bonds and taking what it acknowledges is a more cautious approach than the others, Weiss says the financial condition of many large insurers is fair at best.

Not surprisingly, life insurance executives are outraged by Weiss Research and its outspoken president, Martin D. Weiss.

Relations between Mr. Weiss and certain insurers have become so strained, in fact, that last year the American Council of Life Insurance, the industry's Washington-based trade group, began a campaign to discredit him. The council provided reporters with streams of negative information about Mr. Weiss's track record, professional qualifications and ethics. Among other things, the council noted that Mr. Weiss had been cited 20 years ago for securities law violations. A Nervous Chicken Little?

"Weiss wants to create the impression that the problems of the life insurance industry are greater than they are so that he can sell more of his products," charged Henri Bersoux, an A.C.L.I. spokesman. "He makes Chicken Little look calm."

For his part, Mr. Weiss says the industry is using him to obscure the real issue, which is that it has serious problems. "The A.C.L.I. says that confidence in the industry is declining because of people like me," he said. "I say that confidence is down because of the A.C.L.I."

Indeed, while many life insurance executives view Mr. Weiss as alarmist, simplistic in his analysis and above all interested in enriching himself, some industry experts call him a welcome addition. They say that the older ratings agencies are far too close to the companies they review and that Mr. Weiss is one of the industry's few tough critics. Weiss Research is the only major agency that does not receive the bulk of its revenues from the industry; it rates insurers at its own expense and gears its reports to individual consumers, its primary market and source of funds.

"In light of what happened in 1991, with the failure of three huge life insurance companies, public awareness of the industry has got to be raised," said Michael Adams, a counsel to a House subcommittee that heard testimony from Mr. Weiss last summer. "Martin Weiss certainly serves that function."

Mr. Weiss "doesn't give all A's, and that's why he's gotten into trouble," added Jean Rosales, an economist at the Congressional Research Service. "He's just not as likely to fall for the common view that the big, old-line life insurers can't have problems."

The older ratings services insist that their reports are objective and valuable, notwithstanding that three are paid directly by insurers that ask to be rated while the fourth, A. M. Best, rates everyone but depends on insurers to buy its books, newsletters and industry guides.

"People are interested in our information and find it useful," said Roy Taub, head of Standard & Poor's insurance rating group. Many of those reviewed get high ratings, he said, because "it is the strongest companies that are willing to go through this process."

By contrast, Mr. Weiss uses worst-case scenarios to produce unduly pessimistic grades for some insurers, said Paul Wish, spokesman for A. M. Best. Mr. Weiss's use of a bell-shaped curve for grading -- with most companies ranked average and relatively few given top marks or failing grades -- also reflects flawed thinking, Mr. Wish said. "Why assume that only a tiny proportion of the industry can be outstanding performers?" he said. Seeing Trouble Ahead

Mr. Weiss insists, however, that he has been right on the money with his ratings. His favorite statistic: Of the five large insurers he rated D as of June 30, 1990, three failed within a year. By comparison, he says, of the 23 large insurers he had rated B or better, none had failed. And Mr. Weiss insists that his was the only rating agency to have predicted the troubles of the Executive Life Insurance Company well in advance of that giant company's failure.

In any event, the number of individuals ordering insurance-related reports from Weiss Research has risen steadily since Mr. Weiss started issuing his letter grades in 1989, after more than a decade of rating banks and of publishing financial newsletters. The orders have run as high as 13,000 a month lately. Customers pay $15 to receive over-the-phone ratings on individual insurers, $25 for a one-page summary, $45 for an 18-page report and $189 for a directory of ratings and data on 1,700 insurers.

Still, the Weiss organization remains relatively small. It has 70 employees, only 7 of whom work exclusively on insurance, including the head of insurance ratings, Ted Brownstein. By comparison, Moody's has about a dozen people rating insurers full time and A. M. Best, the biggest of the insurance raters, has well over 100. Weiss Research, being privately held, does not release financial data, but people familiar with the company say its annual sales are below $30 million. As for profits, Mr. Weiss says that his legal bills from fending off irate insurers have become so expensive that his rating business for insurance is only "marginally profitable."

There is nothing marginal, however, about the attention that Mr. Weiss has been garnering. A slim and energetic 45-year-old who is a master of public relations -- he has two publicists on staff -- Mr. Weiss and his dire predictions have been the subject of hundreds of magazine and newspaper articles.

To a certain extent, Mr. Weiss is simply benefiting from good timing. The failure last spring of industry giants Executive Life and First Capital Life, along with the collapse during the summer of Mutual Benefit Life, has raised public concern.

But Mr. Weiss and his analysts also have filled a niche. For years, consumers have complained that insurance reports have been geared more to industry professionals than to individuals. Weiss Research boasts that it is the only agency that serves the average consumer, publishing reports that use plain-English prose and simple charts.

"Weiss certainly has not displaced the other rating agencies, but being consumer oriented he is developing ratings that are finally intelligible to the ordinary policyholder," said Spencer Francis, controller of the National Guardian Life Insurance Company of Madison, Wis., which is rated A by Mr. Weiss. Muted Criticism?

The difference involves more than intelligibility, says Mr. Weiss. Being dependent on the insurance industry for a healthy portion of their revenues, his competitors must mute their criticism, he contends. That, he says, has created a situation in which the others rate companies by shades of excellence, and policyholders are left to decipher what is meant when an insurer is downgraded from the top of the "excellent" category to the middle.

"Even the least knowledgeable insurance agents told us that the A. M. Best ratings in particular were exaggerated," Mr. Weiss said, adding that scores of companies receive A's from Best.

Best, the granddaddy of the insurance rating business with reports on individual insurers dating back to the 1890's, has come under increasing criticism in recent years for being too dependent on the industry it rates.

In fact, say many experts, it was Best's faltering reputation that encouraged S.& P., Moody's and Duff & Phelps, all bond rating agencies, to start rating insurers in the late 80's. But Mr. Weiss, among others, says these agencies are not much better. (S.& P., Moody's and Duff & Phelps get paid from $18,000 to $25,000 by the companies they rate. Best charges a nominal fee to calculate a rating but its reports go into industry guides.)

If there is too much good news from the old timers, Mr. Weiss goes much too far in the other direction, his critics say. His goal, they say, is to make predictions that are gloomy enough to attract reporters' attention and bring him sales.

Critics also say that Mr. Weiss's background as an analyst of banks and savings institutions makes him unqualified to reach conclusions about insurers.

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An anthropology graduate of New York University and Columbia University, Mr. Weiss began his career by working at the investment-newsletter publishing firm of his father, Irving Weiss. One of his first assignments was editing Money and Credit Reports, a newsletter that dealt with interest rates and the safety of financial institutions. Mr. Weiss says he trained for that job as a teen-ager, tagging along when the elder Mr. Weiss visited banks, brokerage firms and insurance companies. On His Own

In 1971, Mr. Weiss struck out on his own, founding Weiss Research to provide investment advice to wealthy individuals. In 1976, he expanded the business to include the publication of his own financial newsletters (his father's newsletters had ceased operating by then).

In 1980, after a two-year stint in Japan as a Fulbright Scholar studying decision making in Japanese financial institutions, Mr. Weiss returned to the United States to begin issuing formal safety ratings on banks and saving associations.

Nine years later, he began rating insurers. Unlike the other major agencies, which rely heavily on management assessments, Mr. Weiss focuses on the detailed financial results that insurers file with state insurance commissions. To generate a letter grade, he crunches all the numbers using a computer model developed by an actuary, Peter Chapman, and an insurance professor, Harold Skipper of Georgia State University.

The problem, from the insurer's point of view, is that Mr. Weiss's computer has assigned shockingly low grades to many companies that have long thought of themselves as being at the top of the class.

Insurers say that Mr. Weiss's formulaic approach often distorts the meaning of the data he uses. Last year, for instance, Mr. Weiss issued a news release in which he identified the Unum Corporation of Portland, Me., as the life insurer to have suffered one of the largest increases in troubled real estate loans of late. Although the statement was technically correct based on the data Unum filed with state regulators, Unum management insists that the numbers overstated the problem and that all Mr. Weiss had to do was talk with management and he would have reached a different conclusion. In brief, Unum executives say that Mr. Weiss misunderstood the structure of their company, which has many affiliates.

"This raises all matters of hell with policyholders when someone like Weiss does something like this," said Rodney N. Hook, Unum's chief financial officer.

Similarly, executives at the Cigna Life Insurance Company say Mr. Weiss gave a distorted picture of their company, which he rated C.

"Weiss's system is so mechanized he cannot distinguish among companies," said Michael Monroe, a Cigna Life spokesman.

Mr. Weiss is unfazed. To the contrary, in November he branched out again, this time into the securities industry. And if his initial ratings there are any indication -- Salomon got a D, Goldman Sachs and Oppenheimer each got a D+ -- he will be attracting plenty of new critics before too long. BIG GUNS SAY THERE'S A LOOSE CANNON

Enraged by what they call his loose-cannon approach to ratings, insurance executives undertook a campaign last year to discredit Martin Weiss. The campaign began in earnest May 4, when Mr. Weiss appeared before a Senate hearing on insurer insolvencies.

Anticipating that Mr. Weiss would predict further turmoil in the industry, representatives of the American Council of Life Insurance descended on reporters with folders full of information attacking his credibility.

The material reviewed Mr. Weiss's mixed record as an economic forecaster as well as a legal problem he had with the Securities and Exchange Commission in 1972. The case, involving the promotion of unregistered securities, resulted in Mr. Weiss's being banned from the securities business for four months.

Less than two weeks later, on May 23, Stephen Young, director of the A.C.L.I.'s New York office, wrote to reporters around the country, calling Mr. Weiss "a critic of marginal credibility who is being allowed to scare the living daylights out of people."

That was followed by a June 18 letter from Henri Bersoux, one of the A.C.L.I.'s spokesmen, who encouraged reporters to "use caution before assigning credibility" to Mr. Weiss. In the same letter, Mr. Bersoux said that Weiss Research had a financial incentive to "release negative news about specific companies."

That was followed by an appearance on ABC's "Nightline" by Richard Schweiker, the former Senator from Pennsylvania who is now president of the A.C.L.I. Mr. Schweiker said that Mr. Weiss had repeatedly blown it as a forecaster -- predicting in 1983, for example, that the prime rate would reach 30 percent -- and did not deserve to be trusted as an insurance rater.

Sue Ann Bailey, the spokeswoman for Weiss Research, said that many of Mr. Weiss's forecasts have been more accurate than the A.C.L.I. is letting on. As for Mr. Weiss's difficulties with the S.E.C., Ms. Bailey said, "Basically, the A.C.L.I. has dredged up a 20-year-old incident that has no bearing whatsoever on Martin Weiss's ability to rate insurers." WHO WARNED OF A FAILURE?

Ever since regulators seized the Executive Life Insurance Company of Los Angeles last April, policyholders and politicians alike have been examining the performance of the rating agencies in predicting the insurer's downfall.

Not surprisingly, all five major agencies claim to have been on top of the situation, signaling to policyholders the trouble that loomed. The truth: Some agencies were much better than others.

Weiss Research was the first to see the danger and to say so unambiguously. In June 1990, after Executive Life took a huge write-off in connection with its large portfolio of junk bonds, Weiss issued a D rating, meaning weak. Moody's also appeared to be on top of the situation, although it equivocated by issuing a Ba2 rating, meaning questionable.

By comparison, Standard & Poor's and Duff & Phelps rated Executive Life BBB and BBB-, respectively, meaning good. A. M. Best, the oldest and biggest of the agencies, issued an A rating, meaning excellent, although it said the company could be downgraded.

Weiss Research has boasted that it was the only agency to have truly "called" Executive Life's problems.

On the other hand, there does seem to be an element of truth to the charge leveled by many industry executives that Weiss Research is so negative in general that the agency is bound to predict failure correctly some of the time.

These critics cite the "fair" rating that Weiss Research awarded Executive Life in 1989. At the time, 60 percent of the insurers rated by Weiss received a similar or poorer grade. And they note that while Martin Weiss, the agency's pugnacious president, has become somewhat less of a Jeremiah in recent months, he still rates the majority of life insurers "fair," "weak" or "very weak."

The Mutual Benefit Life Insurance Company, for example, enjoyed a "fair" rating from Weiss Research shortly before that giant New Jersey-based insurer failed last summer.

Correction: January 12, 1992

An article last Sunday about Weiss Research Inc., an insurance rating agency, misidentified the developer of the computer model used by the company. He is Ted Brownstein, head of Weiss's insurance operation. A large group of experts whose views were solicited by Mr. Brownstein included Peter Chapman, then an outside actuary and now a Weiss employee, and Harold Skipper, an insurance professor at Georgia State University.

A version of this article appears in print on January 5, 1992, on Page 3003001 of the National edition with the headline: The Bad Boy of Insurance Ratings. Order Reprints|Today's Paper|Subscribe